Labor Retreats on the Principle of Progressive Taxation

 

Dr Tristan Ewins

Last month Anthony Albanese announced that not only was Labor backing away from contentious reform of Negative Gearing and Capital Gains tax ; it was also prepared to back income tax cuts for the wealthy ; such that Australia will drift towards a flat and regressive tax regime with Labor’s implicit consent.  As Greg Jericho writes for ‘The Guardian’, Labor is supporting the entrenchment of a tax regime which will see those on below-median and below average wages effectively paying the same rates of tax as income earners between $120,000 and $200,000. 

Rob Harris – writing for the Sydney Morning Herald – explains that these tax ‘reforms’ will cost the Budget “an estimated $137 billion” over their first six years. Specifically, the 37 per cent tax rate will be abolished and a 30 per cent rate will apply to all income between $45,000 and $200,000.  This will occur at a time where ordinary Australian workers will need to service the massive debt induced because of Covid wage subsidies and other subsidies for business.  Those subsidies were (and at the time of writing still are) necessary ; but the debt should not be serviced in a regressive fashion which affects those least able to pay.  And because those on lower incomes spend a greater proportion of their incomes, policies which impact negatively upon them will be ‘bad for the economy’ as well.

Yes, there is a very small minority of wage labourers and others earning over  $100,000 a year. Maybe ten per cent.  But because of their relative privilege parts of this ‘labour aristocracy’ can be inclined to support economically-Liberal distributive taxation policies which minimise redistribution.   The vast majority of wage labourers and vulnerable Australians will not benefit from this policy.  In fact, the scope will be also reduced for improvement of social security and the social wage.  Labor will be restricted in its capacity to deliver reform of Social Security, Medicare, the NDIS, public and social housing, Aged Care.   In the field of social security, easing means testing of recipients with partners could also remove a perverse incentive for disabled Australians to shun relationships because ‘they cannot afford not to be alone’.  Reform of the Jobseeker Allowance (previously ‘Newstart’) is also long overdue and widely accepted.

With Aged Care, Labor is committed to staff ratios ; but to provide this without regressive user pays mechanisms the funding needs to come from somewhere else.  Either reform will be funded progressively or regressively ; or otherwise (even after the Aged Care Royal Commission) it will not happen at all.  After the Royal Commission findings ; which identified gross structural neglect of Aged Australians receiving care ; this would be a damning indictment of the major political parties in Australia who failed to mobilise public opinion around reform even after the shortcomings of the system were laid bare for all to see.  It is not too late to embrace a progressively structured ‘National Aged Care Insurance Levy’ to fund reform of Aged Care in this country.

True, Labor is also intending to reform labour market regulation ; but that in itself will not make up for the distributive consequences of this policy. It will be a case of ‘one step forwards, two steps back’ for Labor where nothing can make up for capitulation on the principles of progressive taxation and redistribution in the most basic sense.  Nonetheless if reform of labour market regulation is strong enough it could still make a difference. Specifically minimum wage rates need to increase significantly ; as well as Award rates for struggling workers – many of whom work in feminised professions such as Aged Care.  Teachers – many of whom also already work unacceptable levels of unpaid overtime – could also do with improved wages and conditions ; and this is essential to attract and maintain the most capable practitioners in the system.

Talk of ‘aspiration’ clouds the fact that Labor’s new tax policy will favour the top ten per cent at the expense of everyone else.  There was a time when radicals would have seen talk of ‘aspiration’ as a kind of ‘false consciousness’. But today Labor is so afraid of the ‘class warfare’ label that it shuns policies that impact even modestly on the top 10 per cent and in favour of everyone else.  Yet ‘flat taxation’ itself is in fact a kind of ‘class warfare’ against the vast majority of working people.

The fact is that in the last election Labor had strong but reasonable tax policies ; but failed to sell and explain those measures at crucial conjunctures. Chris Bowen said those who didn’t like Labor’s tax policies shouldn’t vote Labor. And when many voters failed to grasp Labor’s policies that is exactly what they did.  Furthermore, in the final days of the election campaign – with Bob Hawke’s death – Bill Shorten came across as flat, unconvincing and unemotional.  Despite his commendable work on the NDIS ; and the credit for embracing progressive tax policies in the first place – this fact remains.

Conclusions to the effect ‘it is impossible to sell tax reform’ neglect the fact that Labor failed tactically in mobilising public opinion.  Some Labor figures are reacting defensively to criticisms from the Greens to the effect that Labor is supporting a drift towards flat taxation.  But while the Greens can afford to be more radical because they depend on a narrower electoral base, that does not change the fact that Labor is capitulating on the most basic social democratic principles.  It does not change the fact that we are failing to sell policies that are objectively in the interests of the majority of Australians.

Again: where a bipartisan consensus on radically-regressive tax restructure is conceded, even where Labor does win with such a Platform it is probably a case of ‘one step forward, two steps back’.   Progressives have to actually deliver progress if they are to be seen as credible.  At the moment the best hope is a National Aged Care Insurance Levy, and strong labour market reform. Here’s hoping Labor ‘finds its way’ between now and the election.

Treasury ‘White Paper on Tax’ seized upon by an Abbott Government Considering Regressive ‘Reforms’

 

The Abbott Government's 'White Paper' on Tax could see big changes to superannuation and the overall tax mix.  But the Paper seems oriented towards the Government's Ideological preference for 'small government', 'low tax' and 'simple/regressive tax' as opposed to a progressive tax system. Labor and the Greens need to enunciate a comprehensive alternative - also informed by a progressive ideology of equity and fairness.  Tristan Ewins looks at the alternatives.

Tristan Ewins

31/3/2015

The Federal Australian Treasury’s White Paper on tax reform seems to have been received well by the Abbott Conservative Government. 

Amongst other suggestions, it urges slashing the Company Tax rate to make Australia a more attractive place for investment.   

But arguably decreased Company Tax is not the answer and will only lead to further ‘corporate welfare’. 

The white paper complains that 70 per cent of Commonwealth tax revenue is drawn from personal and company taxes.  But what is the alternative?  A higher GST?  More user pays?  More austerity in the context of an-already stunted social wage and welfare state? 

Dividend Imputation, Corporate Taxation, Corporate Welfare

On the good side, Gareth Hutchens of ‘The Age’  (30/3/2015) notes arguments have arisen for the potential rescission of Australia’s regime of Dividend Imputation. (tax breaks on share dividends; ostensibly to make up for ‘double taxation’)

For a start, lower Company Tax rates dilute arguments about the unfairness of ‘double taxation’.  Australia’s Company Tax rate has been reduced markedly since the Keating Government which introduced the dividend imputation system.  Countries such as the UK and France – which once had imputation – have now dropped the measure.  It no longer appears ‘necessary’ either for ‘fairness’ or ‘competitiveness’.

To clarify: Nicholas Gruen of ‘The Age’ pointed out in 2012 that the cost of Dividend Imputation to the Australian people (as represented in the Government) of over $20 billion a year!  

The result of falling Company Tax, dividend imputation and other pro-corporate measures has been much lower levels of tax paid by business, and the effective consequence of ‘corporate welfare’, in tandem with other effective corporate subsidies. 

For instance David Holmes  at ‘The Conversation’ has noted– “the fuel tax credit scheme to the mining industry”  which delivered $2 billion in corporate subsidies for mining corporate interests in 2011 alone; and a total of over $5 billion all up.

But it goes much further than this.  Corporate welfare can also be interpreted as taking the form of a falling minimum wage and a falling wage share of the economy. In Australia specifically the wage share fell by about ten percentage points since 1959.  (see the associated graph via the hyperlink above)  That means higher levels of exploitation of working people by business. That is, Australian workers are subsidising corporate profit through lower relative wages.

Further, there is an assault on welfare rights to ‘make room’ for effective corporate tax subsidies; and ‘punitive welfare’ , ‘work for the dole’ etc, effectively reduce the bargaining power of workers because of an insecure and desperate ‘reserve army of labour’.

Also consider the proliferation of ‘user pays’ measures. (for example for access to transport infrastructure;  school ‘levies’; a higher cost of living re: water and energy etc)  User pays mechanisms can only spread as a consequence of lower taxes.  What we do not pay for collectively as tax payers, we will pay for (and usually we will pay more) in our capacity as private consumers.   

Declining levels of corporate contributions (via tax) to the construction of infrastructure, and the development of skills which the corporates benefit from – means the burden is increasingly paid by workers, consumers and individual (private) tax payers.  More corporate welfare!

Privatisation of communications, energy and water utilities and assets such as state-owned banks also saw an end to progressive cross subsidies. At the same time – progressively from the 1980s and 1990s - a more regressive tax mix (including the GST) ‘began to bite’.

Importantly, the argument that rates of corporate and personal income tax must fall because of ‘competition’ does not apply to all companies and individuals.  Many companies cater to Australian markets and Australian consumers.   The threat of capital flight is not universally applicable; and contributing to a ‘race to the bottom’ on corporate tax will result in spiralling and out-of-control corporate welfare.  Global action is necessary to stop the existing ‘race to the bottom’ on tax. 

To get the situation in perspective: Company Tax (now 30 per cent)  has been reduced by approximately 20 percentage points since the time of the Hawke Labor Government. 

The cost to the Australian people of this is tens of billions in revenue annually - which might otherwise have been directed towards infrastructure and education (which the corporate world benefits from after all), as well as health, social services and welfare. 

Even though a return to the ‘high water mark’ of corporate tax may not be possible, an increase to levels enjoyed by other advanced economies might be doable, and would make a big difference.  (nb: US Company Tax goes as high as 39 per cent; Japan 37 per cent and France 34 per cent – see HERE)

Furthermore, arguably most Australians are not so ‘mobile’ as the proponents of lower income tax suggest either.  Taxes also contribute to the quality of infrastructure and services which underscore the desirability of living in particular country. This includes the professionals which some say are likely to ‘pack up and leave’ if progressive income taxes remain.   Indeed the quality of education, services and infrastructure also acts as a ‘pull factor’ for investment and skilled labour.

Income Tax and GST

Treasury is also pressing for lower income taxes and a higher, less discriminate GST.  (eg: apply it also to education and food)

But because apparently an increase in GST is rejected by the Andrews Victorian Labor Government we might hope for a more equitable alternative.  

Unfortunately, though, it is more likely we will simply see further austerity.

The Treasury white paper apparently complains that only Denmark relies more on income and company taxation than Australia.   But ‘just because other people are doing something’ is not a strong argument to follow suit.  More appropriate would be to consider what –if anything – is wrong with the Danish tax system and economy.

Wikipedia states of Denmark that:

It has the world's lowest level of income inequality, according to the World Bank Gini (%),^[8] and the world's highest minimum wage, according to the IMF.^[9] As of January 2015 the unemployment rate is at 6.2%, which is below the Euro Area average of 11.2%.^[10] As of 28 February 2014 Denmark is among the countries with the highest credit rating.

So Denmark has a strong economy.  It has chosen ‘a different path’, say, compared with the Anglosphere. But its path of high, progressive taxes, labour market regulation and strong social welfare works! 

Finally the Treasury White Paper has considered the threat of bracket creep, and apparently the Abbott Conservatives are considering an increased GST as an alternative.

Bracket Creep refers to workers being pushed into higher tax brackets as a consequence of inflation, and (only nominally) increasing wages.  Both Labor and Liberal governments have a history of dealing with bracket creep by returning the proceeds to tax-payers through tax cuts.  Though even under Labor arguably this has sometimes been dealt with in a regressive way.   Higher brackets have been eliminated or cut - or raised so high as to minimise their progressive impact - and restrict strongly progressive taxation to only the most wealthy of all.  Arguably this is to the benefit of the upper middle class and the wealthy; and to the detriment of working people, including the working poor.  It means the working class and the poor pay more proportionately; and that those in need suffer with the constriction of the social wage and welfare.

But this is not an honest Liberal-National Federal Government.  Joe Hockey made the ingenuous claim, for instance, that Australians pay 50 per cent of their income in tax.  

As Ben Phillips explained at ‘The Conversation’:

“ Nobody in Australia pays 50% of their income as personal income taxation. According to NATSEM modelling, around 3.5% of those who have a tax liability actually face a top marginal tax rate of 49 cents in the dollar. Around 25% of taxpayers are paying a top marginal tax rate of at least 39 cents in the dollar.”

To summarise – Australia’s income tax system involves several brackets.  Higher brackets and rates only apply after specific thresholds are met. So as Phillips insists: NO-ONE is paying 50 per cent of their income in income tax! 

Hockey is not stupid.  Surely he understood this.  Apparently he was attempting to tap into populist anti-tax sentiment through a deceptive and false argument.

But depending on your notion of ‘the good society’ tax as a whole needs to go up; and the tax and spending mix also needs to be reformed.

Negative Gearing, for instance, benefits upper middle class investors; but does not create much in the way of new employment.  And important social programs demand higher levels of social expenditure.

Crucial priority areas which need substantial public funding include:

·         Full implementation of the National Disability Insurance Scheme as well as ‘lifting up’ the standards and resource base for state schools; Extend the NDIS to apply to aged disability pensioners

·         A big public investment in a National Aged Care Insurance Scheme: to provide for the needs of aged Australians both at home and in care

·         Investment in a comprehensive Medicare Dental Scheme

·         Implement Programs to ‘Close the Gap’ on both Indigenous Life Expectancy and Life Expectancy for the Mentally Ill

·         A big investment in new Public Housing stock – solving the housing affordability crisis by increasing supply

·         Fair Welfare and amelioration of Poverty – Raise all welfare payments by at least $35 a week on top of the current indexing arrangements; Thereafter implement fairer indexing arrangements for Newstart, Sole Parents and Student Allowance;  Relax criteria and significantly slow the withdrawal of payments for disability pensioners attempting to re-enter the work-force; Eliminate welfare poverty traps

·         Restructure the Higher Education Contribution Scheme (HECS); raise the repayment threshold and lower interest on debt; suspend all debt for former students who acquire a disability which interferes with or prevents work

·         Public investment in public infrastructure – Including the National Broadband Network – with Fibre to the Home Broadband

At a crude estimate these items would likely cost over $50 billion a year to implement in the context of an economy valued at around $1.6 Trillion.

Options to fund include Company and Income Tax reform, and withdrawal of Dividend Imputation;  but also the following

·          reform of Superannuation Concessions for the wealthy and the upper middle class*

·         cut Negative Gearing and plough the proceeds into Public Housing;

·         implement an Inheritance Tax;

·         Restore the original (Rudd-inspired) Mining Tax

·         Increase and progressively restructure the Medicare Levy

·         Implement a banking sector tax on super profits

·         Implement progressively-structured infrastructure levies on business and individual taxpayers– to provide for communications, transport, energy-related and water and sanitation related infrastructure – without regressive user pays mechanisms or inefficient/wasteful private finance

·          Implement a progressively structured Aged Care Levy

The Treasury ‘white paper’ on taxation seems to largely comprise a ‘wish list’ for Liberals pursuing an ideological ideal of small government, low taxes, and high levels of inequality. (which the Liberal ideologues put down to ‘merit’)   Labor and the Greens need to develop their own responses.  And hopefully this post will contribute meaningfully to that process.

 

*It should be noted, however, that even $1 million in accrued superannuation will  provide a relatively modest retirement income of $33,000 a year.  (compared with a Single Aged Pension of just over $22,000 and in the case of a couple roughly $17,000 each)  This is far from grandiose – though assuming the recipients’ home is owned it provides relative comfort compared with those fully dependent on the Aged Pension.   (more than $10,000/year additional income)  But The Australia Institute has suggested that cuts in Superannuation Concessions  - which cost taxpayers tens of billions annually – could instead be channelled into a more robust Aged Pension – lifting the full Single Rate to just over $26,000/year, and just under $40,000/year for couples.   The rate at which the Aged Pension is withdrawn could also be slowed, benefitting those with smaller superannuation accounts – and especially women – as a consequence of interrupted working lives and the devaluing of ‘feminised’ professions.  
 

Debate on Low-Tax and Small Government Flares yet Again

Recent Claims by Joe Hockey that Australians pay about half their income to the Government through the tax system has once more spurred a broader debate about tax reform - and the falsehoods spread by the Conservatives and Economic Liberals to rationalise their Ideology.

Tristan Ewins

January 25th, 2015

 

Recently  debate has arisen once more about rates of tax in this country.  Again Joe Hockey has come out with totally unfounded claims that individuals on average pay half of their income in tax.

 In response ACOSS chief executive Cassandra Goldie has argued that in fact middle income earners pay only 11 per cent of their income in personal tax, and higher income groups only about 20 per cent.  

Peter Martin of ‘The Age’ further explains how:  “ACOSS [arrived] at the figures by including all household income in its total, including untaxed or lightly taxed…Income washed through superannuation, family trusts and negatively geared properties.”

Martin also explains how:

“The bottom one-fifth of households pay 3 per cent of their income in personal tax, the next group pays 7 per cent, middle group 11 per cent, the second-top group 15 per cent and the top group 20 per cent…

But [this] progressivity vanishes when other forms of tax are included. Including the goods and services tax and other consumption taxes such as petrol and tobacco excise, the lowest earning household pays 24 per cent of its income in tax and the highest earning household only a little more at 28 per cent.”

So the existing system is also barely progressive when taken as a whole; and the Conservatives want to dilute or reverse this even more!

And today Gareth Hutchens of ‘The Age’ has also questioned the facts surrounding Joe Hockey’s claim that increased taxation through bracket creep is ‘the only alternative’ if Labor does not support the Conservative government’s austerity agenda. 

Crucially: improper reliance on bracket creep and increases in the GST and other regressive taxes and charges – including user pays mechanisms - are not the only alternative.

The Liberals’ offensive against any and all forms of progressive  redistribution rests upon their commitment to a classical liberal economic philosophy which naturalises the inequalities in wealth, income and power that arise under capitalism. Employers rather than workers are seen as ‘the real wealth creators’.  Workers are seen as freely entering into contracts with employers.   Their bargaining power as relates to skills in the marketplace are recognised; but the influence of trade unions in improving that bargaining position of workers is not. Differences in recompense based on demand and supply in the labour market are also ‘naturalised’.  Because of this ‘naturalisation’ government intervention in the economy is rejected outright – except for instance in cases where this paradigm is enforced – for instance through impositions against the industrial liberties of organised labour.  Hence the Conservatives and economic libertarians press for ‘simpler’ tax and lower tax because that means less redistribution.

There is also the question of peoples’ own liberties in their capacities as consumers. This issue is raised by the Conservatives and economic liberals and deserves a considered response.  There is the question of whether or not we are better off to determine our own ‘needs structures’ freely through consumption.

Very few socialists today would aspire to abolishing ‘the market’ in its entirety. Most socialists today would recognise the place of ‘the market’ as a medium by which workers and citizens in their capacities as consumers hold corporations accountable through the play of market signals.  Importantly, though, this entails the organisation of people in their capacity as consumers – both to improve the quality of information they can access as consumers – but also improving their market power through collective bargaining as consumers.

But there are problems with this ‘market utopia’.  Information is not perfect. Consumers are not sufficiently organised.  There are monopolies and oligopolies which minimise the effective role of competitive market forces and signals. And there is the possibility of consumers prevailing to the expense of the more poorly organised  workers. That is: the prospect of more – not less –exploitation.  

ALSO where there is intense competition there is the problem of investment in ‘the means of production’ growing so disproportionate compared with recompense through wages that the market is no longer able to absorb these costs – or provide sufficient consumption power to absorb what is produced.

But if all this is true what are the alternatives?

Firstly Labor should support a progressive restructuring of the tax system as a whole.  That must mean winding back superannuation concessions for the well-off – a good proportion out of about $50 billion in total by 2016-17. In total superannuation concessions  cost about as much the entire aged pension budget. It could also mean partially withdrawing dividend imputation (tax breaks ostensibly to negate ‘double taxation’) - justified on distributive grounds – and with exemptions for ‘small investors’.  

Further – it could entail an active restructuring of the income tax system – as opposed to ‘passively’ waiting for bracket creep to ‘do its work’. ‘Passive’ reliance on bracket creep for lower and middle income tax thresholds would have a regressive distributive effect. (which is why Hockey is willing to consider it despite his preference for ‘ever smaller government’) But restructuring and altering income tax scales and rates could allow bracket creep to work for higher income earners, delivering billions while actually reducing income tax for those on low incomes. A new top income tax rate could also be established for the millionaires.  Restoration of a robust ‘resource rent’ tax for mining could deliver billions; as could ‘super profits’ taxes in crucial areas such as banking. Finally: with modest increases in corporate tax we could signal our desire to end the ‘race to the bottom’ that results in effective ‘corporate welfare’.

If an incoming Labor Government succeeded in raising at least $45 billion in new Commonwealth revenue (in today’s terms) through these and other measures in its first term upon retaking government it would be in a strong position to deliver on Australian taxpayers needs in education, health, transport, communications, welfare and more.  Specifically it could fund big initiatives such as the National Disability Insurance Scheme progressively; And could also provide for another area of critical need – for a National Aged Care Insurance Scheme. Without austerity.

In response the Conservatives and economic libertarians would insist that public provision ‘rejects the market’ which is the proper arbiter of all goods and services.

 But Labor must reject such claims for several very practical reasons; as well as for the sake of economic justice.

Firstly ‘collective consumption’ as taxpayers can often secures for us ‘a better deal’ than in our capacities as isolated private consumers. Private infrastructure means user pays – which hits low and middle income citizens hardest.  It also involves higher rates of borrowing – with the cost structures passed on to consumers.  Finally it  means private profit margins and dividends – which demand that as much income be extracted from consumers as is possible. And in the case of private toll roads, for instance, can mean the exclusion of public transport investment to artificially support the particular private investors.

Competition in place of ‘strategic and natural public monopoly’ also passes on increased underlying cost-structures to consumers.  A ‘hybrid’ economic system which delivered those efficient cost structures on would mean more consumption power – not less.  Business actually gains from this. Both through cheaper infrastructure and services – but also through the increased consumption power of workers and citizens.

Hence there is ‘the bottom line’ that tax-payers would have more to spend in the areas where choice is most important as a consequence of strategic ‘collective consumption’; including ‘social insurance’ for instance.  And frankly ‘market forces’ do not necessarily make enough of a difference when it comes to roads and rail; or in the provision of water and energy; or in areas that are properly the reserve of ‘natural public monopoly’. (eg: energy, water, communications, and transport infrastructure)  Often it all comes down to a contest as to which provider can most efficiently fleece consumers with unintelligible deals and plans foisted upon people who would much rather take ‘the basics’ for granted.  And in areas like Education – ‘market choice’ just sorts us out on the basis of our capacity to pay.  That is, on the basis of class. And that is unfair.

But if ordinary people secure a ‘better deal’ through collective consumption in these areas that frees up more money for determining our needs structures in the areas where that really counts.  For instance, including but not limited to the consumption and other participation in culture, sport, fitness, social activity and art.  

The time has come to question neo-liberal shibboleths around ‘small government’ and ‘the market’.  An alternative is possible which delivers a better deal for the general public in our capacities as workers, citizens and consumers.  But which has also learned from the mistakes of the old socialism which thought it could supersede ‘the market’ entirely.